Wegagen’s Overcapitalization Leads to Slow Profit Growth

Its earning per share declined by 100pc compared with 2011

Wegagen Bank S.C has reported a seven percent rise in profits for the recently ended the year, while its earnings per share dropped to 222 Br from 244 Br of the preceding year.

The earning per share of the Bank has been declining over the past five years. Its current earning per share is half of what it was in 2011. This is largely due to slow growth in profit after tax, which has not kept its pace with massive capital expansion. It has the second highest paid up capital among private banks next to Awash Bank.

Over the past five years, the net profit of Wegagen has experienced a 16.2pc growth despite the rise of the whole industry’s net profit by 167pc. During the same time span, the bank saw a 128pc rise in its paid up capital. Because of this, Wegagen saw a lower EPS than medium sized banks and even below the industry’s average. The average EPS for the former is 27pc while the latter average is at 33pc.

One of the main issues raised during the bank’s latest shareholder meeting was the declining trend of EPS. However, one of the shareholders, who spoke with Fortune on the condition of anonymity, seems optimistic about the long term benefits..

“Our bank is investing in strengthening its assets,” explained the shareholder, citing the construction of the bank’s headquarters. Moreover the bank is now in a good position when it comes to capital base.

Last year, the bank saw a surge of paid up capital by 19pc to 1.7 billion Br. Because of this, the bank is short of 222 million to reach the two billion Br mark set by the National Bank of Ethiopia for private banks in the coming four years.

Wegagen has already floated an international tender for the finishing work on its headquarters, located in front of Yidnekachew Tessema Stadium, on Ras Mekonnen Street.

China Jiangxi Corporation for International Economic and Technical Cooperation (CJIC) was the company awarded the contract for the project in 2011 at a cost of 733 million Br. However, due to soaring construction material prices, the cost now reached over one billion Br. By 2014/15, the Bank had invested 400 million Br in the project.

One of parameters which indicate that the bank is overcapitalized is the excess capital and reserve over asset. The ratio of capital and reserve to asset stands at 16pc, five percent higher than the industry’s average.

“The management of Wegagen needs to seriously look into its capitalization policy as well its competitive standing in the industry,” Abdulmenan Mohammed Hamza, an analyst at London Portobello commented.

“The massive capital resulted from the huge expansion of the bank. Returns on such investments will be visible in the long term period, said Fikiru W. Tinsie, Director, Marketing & Corporate Communications at Wegagen.

As far as deposit mobilization is concerned, the bank has opened 54 branches last year which raises its network to 170, while at the national level, the branch network of all commercial banks has reached over 3,187.

A look at the financial intermediation of the bank shows a positive result. The bank posted an interest earnings of over one billion Br, up from 853.6 million Br in the prior-year period.

Wegagen has a good standing in foreign exchange dealing. It earned 319.4 million Br income from foreign exchange dealings, which is three percent higher than the 2014/15 fiscal year. Last year, the financial industry was challenged by a short supply of foreign exchange. Two weeks ago, Dashen Bank, one of the biggest private banks, reported a four percent decline in foreign exchange dealings to 288 million Br.

In 2014/15, the private banking industry leveraged a 1.63 billion Br gain from foreign exchange dealings, which was 17pc of the total industry’s income. Of this, the share of Wegagen was close to 19pc.

Overall, despite the 14pc increase in the bank’s income, the profit after tax growth is almost half of the total income increase due to soaring expenses.

The industry is known for massive increases in expenses due to inter-industry competition. To remain competitive and grow, banks have spent many resources without a corresponding growth in income.

As observed in the industry, the total expenses of Wegagen expanded by 20.5pc to 668.1 million Br.

The increase in expenses was also the concern of some of its shareholders as it was reflected in the annual meeting. They called it “unnecessary”.

“The major aim of shareholders is profit maximization. Some of them don’t really understand the aim of the expenditure,” said Fikiru, the marketing expert of the bank.

In 2015/16, Wegagen has spent more money to generate an income of one birr. The amount spent to make one birr has increased to 58.27 cents from 55 cents a year ago. The figure is 10.3pc lower than the prior year industry’s average.

Since 2013/14 Wegagen has been pinched by a high amount of doubtful loans. During the last fiscal year, the bank expended over 43 million Br for the provision of doubtful loans, advances and other debts; 59pc higher than 2014/15. This amount represents 9.15pc of the profit before tax of the Bank.

“The Bank should look at its credit systems and install strong credit control mechanism to keep the bad loans at bay,” Abdulmenan commented.

“The surge in provision of doubtful loan is owed to a rise in the loan portfolio,” Fikru argues.

Last year, the bank mobilized a loan and advances of 7.5 billion Br from six billion birr in 2014/15. However, the non-performing loans of the bank amounted 1.7pc, which is below the five percent ceiling set by the central Bank.

Wegagen, established almost two decades ago by 16 founding members with an initial capital of 30 million Br, currently has 2,349 shareholders.




Published on Nov 22,2016 [ Vol 17 ,No 864]



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